Managing Operating Exposure and FX Risk at Nissan:
Global businesses are usually exposed to financial risks like currency volatility. The , which are commonly known as FX risks, have significant effects on all aspects of a global company. Notably, the foreign exchange risks affect firms across various industries including the automobile industry. In this industry, the operations and manufacturing processes of auto makers are usually affected by currency fluctuations. An example of a global firm in the automobile industry that has been involved in managing the foreign exchange risks and operating exposure is Nissan.
In 1999, Nissan was in a death spiral as the firm was experiencing heavy losses, carrying massive debts, and has a bad reputation. During this period, Carlos Ghosn was appointed as the Chief Executive Officer in order to help save the company that was sinking into further challenges and complexities. In attempts to rescue the firm, it was important for Nissan’s state to be understood before any strategies proposed by the new CEO could be implemented. Notably, Ghosn managed to enable Nissan to find its killer instinct as the firm turned out great cars and achieved the highest profit margins in the automobile industry (Book Review, 2005). The ability of Ghosn to rescue the company from its poor state is attributed to the measures he implemented in managing the global financial risk.
Ghosn turned the fortunes of Nissan through following some of the major steps in managing global financial risks. These steps, which were designed by Well Fargo’s Dave Napalo, help in the establishment of a successful corporate foreign exchange policy. First, the CEO indentified how the deep financial crisis had been reached and defined the corporate philosophy and objectives together with the management as the first step to mitigating financial exposures. In this case, the main corporate philosophy and objective established by the firm was to achieve the highest profits margins in the industry that were even slightly higher than that of Toyota Motor Corporation.
The second step implemented by Ghosn was identifying exposures through which he , design, and sales team from the firm’s management and Renault. These teams were mandated with the task of uncovering every problem and establishing new, realistic, and tough performance goals. Third, Ghosn defined risk management policies and procedures that involved lessening the costs of purchasing by 20%, closing five plants, dislodging 20,000 odd employees through attrition and layoffs, and minimizing capacity by 30% (Nguyen, 2011).
The fourth step implemented by the CEO was the identification of strategies to manage risk which including ensuring that the Japanese executives accepted his strategy for acknowledging the reality of their struggle. These additional strategies also included reviving the brand through rejuvenating Z-series and introducing SUV crossovers. The final step in the process was the implementation of these strategies through focusing on profitability, volume, and return on investment. As evident in reports in 2002, Nissan had achieved its goals of making more profit through additional sales of one million vehicles, operating margins of 8%, and operating debt of zero.
Generally, the dynamic relation of currency exposure and management of operating exposure make it complex to understand the whole nature of operating exposure (Kim & McElreath, 2001, p.1). Ghosn saved Nissan through successful adopting and implementing 5 of the 8 steps proposed by Napolo. The five steps adopted by the new Chief Executive Officer are discussed above and were crucial in rescuing Nissan. The three steps which were not followed are quantifying exposures, monitoring exposures and hedges, and review of performance.
References:
Book Review. (2005, January 17). The Gaijin Who Saved Nissan. Retrieved December 7, 2012,
from http://www.businessweek.com/stories/2005-01-16/the-gaijin-who-saved-nissan
Kim, Y. & McElreath, R. (2001). Managing Operating Exposure: A Case Study of the Automobile Industry. Multinational Business Review, 9(1), 21.
Nguyen, C. (2011, October 25). How Nissan Bucked the . Retrieved December 7, 2012, from http://bizcovering.com/management/how-nissan-bucked-the-auto-bailout-trend/
